## cr17264

## Source details

**Canonical URL:** [cr17264](https://www.imf.org/-/media/files/publications/cr/2017/cr17264.pdf)

## Other formats

- [Markdown version](/-/media/files/publications/cr/2017/cr17264.pdf.md)
- [Structured JSON version](/-/media/files/publications/cr/2017/cr17264.pdf.json)

---

### Executive Summary — Context and recent macroeconomic developments
- Growth and labor market:
  - Growth was 1.2 percent in 2016.
  - Preliminary 2017 growth: 3.8 percent (y-o-y) in Q1 and 4.8 percent (y-o-y) in Q2, driven by a strong rebound in agricultural output.
  - Job creation: 109,000 in Q1 2017 (versus job losses of 13,000 in Q1 2016).
  - Unemployment rate: 10.4 percent (Q1 2016) to 10.7 percent (Q1 2017).
  - Youth unemployment: 24.9 to 25.5 percent.
  - Female unemployment: 13.8 to 14.7 percent.
  - Urban unemployment: 15 to 15.7 percent.
- Inflation and credit:
  - Average inflation for the first five months of 2017 was about 1 percent.
  - Bank Al-Maghrib policy rate reduced to 2.25 percent in March 2016.
  - Credit growth recovered to 5.1 percent by May 2017 (y-o-y); credit to non-financial private enterprises at 2.1 percent (y-o-y).
- External sector and reserves:
  - Current account deficit projected to narrow to 4 percent of GDP in 2017 (from 4.4 percent in 2016).
  - Exports picked up 5.3 percent (y-o-y) as of May 2017; imports strengthened by 9 percent.
  - Reserves fell to US$20.6 billion by end-June 2017 (from US$25.4 billion at end-2016) after BAM interventions; projected to reach US$24.2 billion by end-2017.
  - Reserve metrics: equivalent to six months of imports; 90 percent of the Assessing Reserve Adequacy (ARA) metric (119 percent of the ARA adjusted for capital controls).
  - End-March 2017 reserves indicative target (IT) missed by about 4 percent (US$1.1 billion).
- Fiscal developments:
  - Public debt was 64.7 percent of GDP at end-2016.
  - End-March 2017 fiscal deficit IT met: deficit of 0.7 percent of GDP against an indicative target of 0.73 percent.
  - Preliminary end-May 2017 fiscal deficit: 1 percent of GDP (vs 2.6 percent of GDP at the same period last year).
  - Cyclically-adjusted primary deficit (excluding grants) decreased by about 1.9 percent of GDP relative to the same period last year.
- Financial sector soundness:
  - Banks’ capital ratios: 14.2 percent at end-2016.
  - NPL ratios: 7.8 percent in May 2017.
  - Provisioning levels described as comfortable.
  - Concerns: relatively high NPLs, credit concentration risks, and risks from rapid expansion in Africa.

### Key policies, reforms, and government program
- New government commitments and continuity:
  - New coalition government appointed early April 2017; program aligned with prior government and PLL objectives (fiscal consolidation, greater exchange rate flexibility, tax reforms, civil service reform, SOE oversight, fiscal decentralization, business environment improvements).
- Specific medium-term objectives by 2021 (government program):
  - Reach economic growth between 4.5 and 5.5 percent and keep inflation below 2 percent.
  - Keep the budget deficit below 3 percent of GDP and reduce public debt to 60 percent.
  - Reduce unemployment to 8.5 percent.
  - Increase secondary education enrollment to 97 percent (from 88 percent today).
  - Reduce illiteracy to 20 percent (from 30 percent today).
  - Increase access to basic health services to 100 percent (from 60 percent today).
  - Reduce infant mortality to 20 deaths per 1,000 births (from 27 today).
  - Increase access to roads in rural areas from 79 to 90 percent.
  - Reduce the housing deficit from 400,000 to 200,000 units.
- Policy and reform priorities highlighted by staff:
  - Accelerate tax reforms in line with recommendations from the 2013 national tax conference, including measures to boost VAT revenues and reduce tax exemptions (e.g., in the agricultural sector); consolidate the corporate tax regime; better enforce tax payments by the self-employed and liberal professions.
  - Ensure sound public financial management at the local level as part of fiscal decentralization.
  - Pursue comprehensive civil service reform.
  - Enhance financial oversight of state-owned enterprises (SOE).
  - Strengthen and better target social safety nets (including development of a social registry with World Bank assistance).
  - Improve education, governance, and labor market reforms to reach medium-term objectives.

### PLL arrangement assessment and program implementation
- PLL arrangement background:
  - Executive Board approved a two-year precautionary and liquidity line (PLL) arrangement in July 2016 in the amount of SDR 2.504 billion (or 280 percent of quota), equivalent to US$3.556 billion.
  - The arrangement supports rebuilding fiscal and external buffers and promoting higher, more inclusive growth.
  - The first review was completed on May 12, 2017.
- Staff recommendation and assessment:
  - Staff considers Morocco continues to meet the PLL qualification criteria and recommends completion of the second review of the PLL arrangement.
  - Assessment highlights:
    - Morocco’s economic fundamentals and policy frameworks are sound; the country is implementing and has a track record of implementing generally sound policies and remains committed to maintaining such policies.
    - Staff assesses strong performance in four out of five PLL qualification areas: external, monetary, financial, and data.
    - The fiscal area does not substantially underperform the other areas.
    - The authorities have not drawn on the arrangement and continue to treat it as precautionary.
- Program implementation notes:
  - The end-March 2017 fiscal deficit IT was met; the end-March 2017 reserves IT was missed.
  - Reserves declined in May-June due to BAM interventions to counter devaluation anticipations, higher energy imports, and accelerated FDI outflows and loan repayments; pressures subsided after the government announced the initial fluctuation band would be five percent and that the exchange rate transition would not start immediately.
  - Staff encourages starting the gradual transition to greater exchange rate flexibility as soon as possible; technical assistance ongoing.

### Risks, outlook, and policy recommendations
- Risks:
  - Significant domestic and external risks remain, including weak growth in the euro area and geopolitical risks in the region.
  - Domestic social tensions, notably since October 2016 in the Rif region, represent political and social risks; authorities have announced steps to accelerate local social programs and investment projects.
  - Financial sector risks from bank expansion in Africa given riskier operating environments and lower regulatory standards in some host countries.
- Recommended policy mix and priorities:
  - Maintain gradual fiscal consolidation while preserving social priorities and minimizing social impact of reforms.
  - Continue accommodative monetary policy to support recovery, while preparing for a gradual move to greater exchange rate flexibility.
  - Accelerate tax reforms to strengthen revenue performance ahead of expected declines in grant revenues from 2018.
  - Improve targeting and coordination of social spending through better governance, transparency, efficiency, and development of a social registry.
  - Strengthen financial sector supervision and implement FSAP recommendations, including enhancing supervisory capacity and finalizing the new central bank law to strengthen independence and clarify the role for financial stability.

*International Monetary Fund staff report — Executive Summary (July 19, 2017).*

### Structural reform priorities and implementation status
- Business environment:
  - Authorities intend to continue reforms, including further simplifying and modernizing administrative procedures (W-COM.-¶14), with the goal of positioning Morocco in the top 50 countries in the Doing Business ranking by 2021 (against 68 in 2017).
  - Regarding SME access to finance, important improvements to the insolvency and collateral frameworks will be introduced in 2018.
  - The recently-adopted limit on payment delays (60 days) is welcome.
  - Key reforms have recently been further delayed: more concrete progress is needed in implementing the national strategy against corruption adopted in 2015.
  - Members of the Competition Council need to be appointed to exercise the powers given in 2014 to promote domestic competition (W-COM.-¶14).
- Education and labor market:
  - Progress needed in implementing the 2015–30 education strategy, including promptly adopting the draft framework law, and developing a concrete action plan under the national employment strategy adopted in 2015.
  - The framework law and the action plan are now expected to be finalized in 2018 (W-COM.-¶14).
  - Labor market reforms should focus on hiring and firing costs, in particular by relaxing restrictions on fixed-term contracts and layoffs to better integrate young workers, while establishing adequate safety nets for the unemployed.
  - On education, authorities plan to increase investment in school infrastructure, facilitate deployment of additional teachers, and expand cash transfer programs in rural areas to improve educational outcomes, notably for girls.

### Outlook and key quantitative projections — Growth, inflation, external sector, fiscal
- Growth:
  - Growth is expected to rebound to 4.8 percent in 2017, reflecting a strong pickup in agricultural output and a slow recovery of nonagricultural activity.
  - In 2018, assuming a return to normal agricultural production, growth would slow to 3.0 percent despite steady pick-up in nonagricultural growth.
  - Over the medium term, growth should reach 4.6 percent, subject to continued reforms and assuming an average agricultural production level.
  - Additional reforms in education, labor market and competition will be needed to achieve the government’s objective of 5.5 percent by 2021.
- Inflation:
  - Inflation is expected to remain low at 0.9 percent in 2017 due to a decline in domestic food prices.
  - Projected to stabilize around 2 percent over the medium term.
- External sector and reserves:
  - Current account deficit should narrow to about 4.0 percent of GDP in 2017, and remain around 2–3 percent of GDP thereafter.
  - Drivers: (i) continued export growth including higher value-added manufacturing and recovering phosphate exports; (ii) steady imports with slowly rising oil prices and continued investment-related imports; (iii) declining grant revenues.
  - FDI inflows are projected to remain robust.
  - Reserves position expected to rise to around seven months of imports, or 103 percent of the standard Assessing Reserve Adequacy (ARA) metric (136 percent of the adjusted metric) in the medium term.
- Fiscal outlook:
  - Overall fiscal deficit expected to decline to 3.5 percent of GDP in 2017 and stabilize around 2.1 percent of GDP in the medium term.
  - Government objective: reduce public debt to 60 percent of GDP by 2021.
  - Achieving objectives will require expeditious measures to enhance tax revenues, continued efforts to contain current spending, and identifying contingency measures for potential grant revenue shortfalls.
  - Projected tax revenue increases have been revised downward relative to the PLL request (by 1 percentage point of GDP in 2021), reflecting lower expected payoffs of tax reforms, including because of recent delays in reform implementation.
  - Offsetting measures include a parallel reduction in capital transfers to SOEs, current spending by local entities, and public investment.

### Risks, scenarios, and External Stress Index
- Balance of risks tilted to the downside:
  - Domestic risks: delays in implementing key reforms and policy uncertainty could reduce future fiscal space, contribute to social tensions, adversely impact the external sector (lower tourism receipts, remittances, or grants), and weaken the expected pickup in potential growth.
  - Exchange rate risks: renewed uncertainty regarding the exchange rate transition could lead to market pressures, potentially weakening the current account and reserves.
  - External risks: weak growth in the euro area; geopolitical risks; tighter, volatile financial conditions.
  - Upside: continued lower energy prices would help further narrow external and fiscal imbalances.
- External Stress Index (Box 2):
  - Proxy variables and weights (as of the PLL request stage): euro area growth 0.580; VXEEM 0.095; change in oil price 0.324.
  - Baseline scenario: July 2017 WEO projections; result: external economic stresses marginally declined relative to July 2016 request.
  - Downside scenario: euro area growth one percentage point lower than baseline, a US$15 increase in oil prices relative to baseline, and an increase in VXEEM by two standard deviations; external stresses broadly comparable to July 2016 request.
  - Overall assessment: external pressures under the baseline have abated in recent years, but model omits a proxy for geopolitical risk.

### Review of PLL qualification — staff assessment and institutional strengths
- General assessment highlights:
  - Economic fundamentals and institutional policy frameworks remain sound; country has a track record of implementing sound policies and is committed to doing so.
  - Macroeconomic developments broadly positive: favorable fiscal developments until May 2017, current account expected to narrow in 2017, public and external debts sustainable.
  - Authorities committed to maintaining sound policies; public finances expected to improve in 2017; government intends to reduce public debt to 60 percent of GDP by 2021 (instead of 2020 initially agreed), requiring fiscal deficit around 2.1 percent of GDP.
  - Policy and institutional frameworks increasingly flexible: new OBL enhancing budgetary procedures and practices; Morocco performs well in fiscal policy countercyclicality indicators; BAM has clear mandate and authorities intend to upgrade monetary policy regime as part of transition to greater exchange rate flexibility and inflation targeting.
  - Morocco scores mid-range on World Bank anti-corruption and government effectiveness ranking.
- Specific PLL qualification areas:
  - Strong in four of five PLL areas: external position and market access; financial sector and supervision; monetary policy; data adequacy.
  - Does not substantially underperform in fiscal policy.

### Qualification criteria and external position — selected numeric indicators
- Sovereign issuances and maturities:
  - Ten-year EUR1 billion bond at 3.5 percent in mid-2014; ten-year US$1.5 billion bond at 4.25 percent in 2013; twenty-year EUR0.75 billion bond at 5.5 percent in 2013.
  - Average maturity of public external debt: eight years and six months currently (against seven years and four months in 2009).
- Reserves expected metrics:
  - About six months of imports at end-2017.
  - 90 percent of the standard ARA metric at end-2017.
  - 119 percent of the metric adjusted for capital controls at end-2017 (against 99 percent and 129 percent at end-2016, respectively).
  - By 2022: seven months of imports, 103 percent of the standard ARA metric, and 136 percent of the metric adjusted for capital controls.

### Fiscal policy and public debt — selected numeric indicators and policy actions
- Authorities aim to reduce public debt to 60 percent of GDP by 2021 (against 64.7 percent of GDP in 2016).
- Required fiscal stance: fiscal deficit around 2.1 percent of GDP in the medium term.
- Average maturities increased from six years and six months in 2014 to seven years and five months in 2016.
- Policy actions and priorities:
  - Control civil service wage bill by limiting net creation of positions and rate of career promotions.
  - Prioritize investment in infrastructure and human capital.
  - Future fiscal consolidation should rely more on accelerated tax reforms: broadening the tax base, reducing exemptions, boosting VAT revenues, and improving corporate taxation.
  - Further civil service reform to generate long-term savings.
  - Fiscal decentralization to ensure sound public financial management at the regional level.
  - Draft law to reinforce governance and oversight of SOEs should be submitted to parliament in the near-term.

### Monetary policy and financial sector — selected numeric indicators
- Inflation and policy:
  - Morocco maintains moderate and stable inflation; authorities aim to gradually shift to an inflation targeting regime as part of transition to greater exchange rate flexibility (W-COM.-¶12).
  - Preconditions for transition largely in place.
- Financial soundness:
  - NPL ratios at 7.8 percent at end-May 2017.
  - Provisioning levels are high and increasing.
  - 2015 FSAP stress tests showed the banking system could withstand severe shocks.
- Supervision:
  - Introduction of stricter capital and provisioning requirements and enhancements to the macroprudential policy framework are underway.
  - Oversight of Moroccan banks expanding across Africa has been strengthened, including collaboration with supervisory agencies in host countries (W-COM.-¶11).

### Data adequacy and safeguards
- Data transparency and integrity:
  - Overall data quality continues to be strong and adequate to conduct effective surveillance and program monitoring.
  - Morocco subscribes to the Special Data Dissemination Standard.
  - Data provision and quality are assessed as fully adequate.
- Safeguards:
  - 2015 assessment found a robust safeguards framework with strong control mechanisms at the central bank.
  - One remaining recommendation: strengthen the BAM law in areas of autonomy and governance.
  - Authorities have drafted a new central bank law to be submitted to Parliament in mid-2017.

### Program targets, external financing and debt-service capacity — selected figures
- Gross reserves (US$ billions): 2016 26.3; 2017 24.6; 2018 25.5; 2019 27.2; 2020 29.7; 2021 32.9; 2022 37.2.
- Reserves in months of next year imports: 2016 6.9; 2017 6.5; 2018 5.9; 2019 5.9; 2020 6.0; 2021 6.2; 2022 6.5; 2023 7.5.
- Current account excluding official transfers (percent of GDP): 2016 -3.3; 2017 -4.3; 2018 -4.9; 2019 -3.9; 2020 -3.4; 2021 -2.6; 2022 -2.0; 2023 -1.5.
- Total government debt (percent of GDP): 2016 63.3; 2017 64.7; 2018 63.8; 2019 64.3; 2020 63.2; 2021 62.9; 2022 61.1; 2023 60.5; 2024 59.1; 2025 57.6.
- Public gross financing needs (percent of GDP): 2015 13.7; 2016 13.4; 2017 10.4; 2018 10.4; 2019 10.1; 2020 8.1; 2021 8.3; 2022 7.7; 2023 6.7.
- External financing (selected):
  - Gross financing requirements (US$ millions): 2016 6,653; 2017 6,743; 2018 5,612; 2019 5,590; 2020 5,036; 2021 4,531; 2022 3,834.
  - Current account deficit (US$ millions): 2016 4,537; 2017 4,352; 2018 3,622; 2019 3,573; 2020 3,083; 2021 2,534; 2022 1,967.
  - FDI (net) (US$ millions): 2016 1,683; 2017 1,684; 2018 2,234; 2019 2,448; 2020 2,679; 2021 2,910; 2022 3,158.
  - Change in gross reserves (US$ millions): 2016 (2,764); 2017 1,838; 2018 (1,257); 2019 (1,657); 2020 (2,388); 2021 (3,071); 2022 (4,189).
- PLL drawdown considerations:
  - Should Morocco draw on the entire amount available, Fund obligations would represent a maximum of 8.2 percent of Morocco’s total external debt over the projection period; debt service (36.4 percent); gross international reserves (14.6 percent); and exports (9.8 percent).
  - Illustrative scenario at PLL request suggested peak IMF credit ratios could be higher (19.5 percent and 10.4 percent in alternative scenarios).

### Staff appraisal and recommendation
- Program status and macro outlook:
  - Program remains on track.
  - End-March 2017 fiscal deficit IT met; NIR IT missed due to widening current account deficit driven by imports related to the drought and infrastructure projects.
  - Macroeconomic situation improving in 2017: growth expected to accelerate, public deficit expected to decline, external imbalances projected to narrow.
- Staff recommendation:
  - "Staff recommends the completion of the second review under the PLL arrangement."
  - Note: "Upon approval of the second review of the PLL arrangement Morocco can draw up to 280 percent of quota. The Moroccan authorities have expressed their intention to treat the arrangement as precautionary."

### Appendix I — Written Communication: authorities’ positions and commitments (selected points)
- Economic outlook and macro indicators cited by authorities:
  - 2016 growth "limited to 1.2 percent"; 2017 expected "4.8 percent" (described as "its highest level since 2011").
  - 2017 inflation expected "0.9 percent".
  - Q1 2017 unemployment "10.7 percent" (Q1 2016 "10.4 percent").
  - Current account 2016 "4.4 percent" of GDP (deficit); 2017 expected "4 percent" of GDP (deficit).
  - Foreign exchange reserves 2017: "6 months of imports".
  - PLL arrangement approved July 22, 2016 is treated as precautionary insurance.
- Fiscal policy and consolidation targets cited by authorities:
  - Fiscal deficit 2016 "4.1 percent of GDP"; 2017 objective/target "3.5 percent of GDP"; PLL target for 2021 "2.1 percent of GDP".
  - Public debt ratio 2016 "64.7 percent" of GDP; medium-term objective "60 percent by 2021".
  - Fiscal measures to achieve 2017 target: "increased tax revenues" and "better control of current expenditures, notably with regards to the wage bill and subsidies".
  - March 2017 indicative target met; June 2017: "significant overperformance in tax collection and current spending control, including on wages".
- Revenue-side reforms and tax policy commitments:
  - Continue tax reform per 2013 national tax conference recommendations: reduce exemptions (particularly for large agricultural firms), simplify VAT by reducing the number of rates, expand tax base by modernizing tax administration and gradually incorporating the informal sector.
  - Measures introduced in the 2017 budget; additional measures to be incorporated in the 2018 budget.
- Expenditure control, civil service and public investment commitments:
  - Maintain public investment "at a high level" while ensuring fiscal consolidation and increasing effectiveness.
  - Medium-term wage bill objective: bring civil service wage bill including social contributions back to 10.5 percent of GDP by limiting net creation of positions and rate of advances and promotions.
  - Public investment management and PPPs: develop PPPs and an integrated system for management and assessment of public investments.
  - Pension reform: "Gradual implementation of the pension reform began in September 2016" and a shift toward a "bipolar (private sector/public sector) system" is expected in the medium term.
- Monetary and financial sector commitments:
  - BAM maintained "an accommodative monetary policy"; will continue to "promote appropriate financing of the economy, and in particular for SMEs".
  - Draft central bank law approved by the Government Council on "July 13, 2017" to be submitted to Parliament; expected to "further reinforce BAM’s independence" and expand missions to contribute to financial stability and financial inclusion.
  - Banking sector described as "sound and resilient"; NPLs "have not increased" and are "well provisioned" though credit concentration and Africa exposure risks remain.
  - Macroprudential measures: introduction of counter-cyclical capital buffers (CCB); guidance for recovery plans for systemically important institutions; strengthen framework for handling problem banks with legal resolution.
- Transition to greater exchange rate flexibility:
  - Authorities "determined to gradually introduce a more flexible foreign exchange system and to transition to an inflation targeting regime."
  - Planned start by end-June 2017 postponed after hedging demand led to a decline in official reserves; postponement and limited initial band helped stabilize official reserves.
  - Reserves expected to "start to recover" through seasonal tourism and remittances and as options bought by market participants expire.
- Structural reforms and competitiveness commitments:
  - Accelerate reforms in education, training and scientific research; finalize key laws and action plans in early 2018.
  - Continue national strategy to fight corruption, improve public services, and dematerialize administrative procedures.
  - Enable the Competition Council to "fully exercise its powers in 2017".
  - Finalize the action plan of the National Strategy for Employment in early 2018 to boost youth employment and women’s labor force participation.
- PLL monitoring and targets (selected table items):
  - Indicative targets — Net international reserves (NIR) of BAM end-of-period stock (millions of U.S. dollars): 25,981; 25,717; 26,302; 27,461; 26,825; 25,719; 23,199.
  - Indicative targets — Fiscal deficit (cumulative since beginning of fiscal year, eop in millions of dirham): 27,228; 30,629; 26,973; 7,302; 9,499; 6,747; 26,135.
  - Memorandum items — Adjustor on NIR (in millions of U.S. dollars): 918; 567; 351; 2,011; 636; 1,375; 2,819.
  - Memorandum items — Adjustor on the fiscal deficit (in millions of dirham): 7,045; 3,400; 3,645; 2,410; 2,197; 213; 7,500.
  - Footnote on program exchange rate: fixed at the end-April 2016, namely 9.5695 MAD/$.
- Authorities’ commitment and EPE views:
  - Authorities assert policies are "adequate to achieve the objectives of the economic program supported under the PLL arrangement" and commit to treat the PLL as precautionary.
  - Authorities note "significant improvement in Morocco’s fundamentals and reduction in vulnerabilities under the 2014–2016 PLL" and defend gains in competitiveness and export diversification.
  - Authorities remain committed to moving to a more flexible exchange rate regime and will announce the start when appropriate.

*Source: IMF staff report excerpts and tables (cr17264).*

### EXECUTIVE SUMMARY

### EXECUTIVE SUMMARY

### Context and recent macroeconomic developments
- Growth prospects for 2017 have improved, but nonagricultural growth is subdued.
- Growth and labor market:
  - Growth was 1.2 percent in 2016.
  - Preliminary 2017 growth: 3.8 percent (y-o-y) in Q1 and 4.8 percent (y-o-y) in Q2, driven by a strong rebound in agricultural output.
  - Job creation: 109,000 in Q1 2017 (versus job losses of 13,000 in Q1 2016).
  - Unemployment rate: 10.4 percent (Q1 2016) to 10.7 percent (Q1 2017).
  - Youth unemployment: 24.9 to 25.5 percent.
  - Female unemployment: 13.8 to 14.7 percent.
  - Urban unemployment: 15 to 15.7 percent.
- Inflation and credit:
  - Average inflation for the first five months of 2017 was about 1 percent.
  - Bank Al-Maghrib policy rate reduced to 2.25 percent in March 2016.
  - Credit growth recovered to 5.1 percent by May 2017 (y-o-y); credit to non-financial private enterprises at 2.1 percent (y-o-y).
- External sector and reserves:
  - Current account deficit projected to narrow to 4 percent of GDP in 2017 (from 4.4 percent in 2016).
  - Exports picked up 5.3 percent (y-o-y) as of May 2017; imports strengthened by 9 percent.
  - Reserves fell to US$20.6 billion by end-June 2017 (from US$25.4 billion at end-2016) after BAM interventions; projected to reach US$24.2 billion by end-2017.
  - Reserve metrics: equivalent to six months of imports; 90 percent of the Assessing Reserve Adequacy (ARA) metric (119 percent of the ARA adjusted for capital controls).
  - End-March 2017 reserves indicative target (IT) missed by about 4 percent (US$1.1 billion).
- Fiscal developments:
  - Public debt was 64.7 percent of GDP at end-2016.
  - End-March 2017 fiscal deficit IT met: deficit of 0.7 percent of GDP against an indicative target of 0.73 percent.
  - Preliminary end-May 2017 fiscal deficit: 1 percent of GDP (vs 2.6 percent of GDP at the same period last year).
  - Cyclically-adjusted primary deficit (excluding grants) decreased by about 1.9 percent of GDP relative to the same period last year.
- Financial sector soundness:
  - Banks’ capital ratios: 14.2 percent at end-2016.
  - NPL ratios: 7.8 percent in May 2017.
  - Provisioning levels described as comfortable.
  - Concerns: relatively high NPLs, credit concentration risks, and risks from rapid expansion in Africa.

### Key policies, reforms, and government program
- New government commitments and continuity:
  - New coalition government appointed early April 2017; program aligned with prior government and PLL objectives (fiscal consolidation, greater exchange rate flexibility, tax reforms, civil service reform, SOE oversight, fiscal decentralization, business environment improvements).
- Specific medium-term objectives by 2021 (government program):
  - Reach economic growth between 4.5 and 5.5 percent and keep inflation below 2 percent.
  - Keep the budget deficit below 3 percent of GDP and reduce public debt to 60 percent.
  - Reduce unemployment to 8.5 percent.
  - Increase secondary education enrollment to 97 percent (from 88 percent today).
  - Reduce illiteracy to 20 percent (from 30 percent today).
  - Increase access to basic health services to 100 percent (from 60 percent today).
  - Reduce infant mortality to 20 deaths per 1,000 births (from 27 today).
  - Increase access to roads in rural areas from 79 to 90 percent.
  - Reduce the housing deficit from 400,000 to 200,000 units.
- Policy and reform priorities highlighted by staff:
  - Accelerate tax reforms in line with recommendations from the 2013 national tax conference, including measures to boost VAT revenues and reduce tax exemptions (e.g., in the agricultural sector); consolidate the corporate tax regime; better enforce tax payments by the self-employed and liberal professions.
  - Ensure sound public financial management at the local level as part of fiscal decentralization.
  - Pursue comprehensive civil service reform.
  - Enhance financial oversight of state-owned enterprises (SOE).
  - Strengthen and better target social safety nets (including development of a social registry with World Bank assistance).
  - Improve education, governance, and labor market reforms to reach medium-term objectives.

### PLL arrangement assessment and program implementation
- PLL arrangement background:
  - Executive Board approved a two-year precautionary and liquidity line (PLL) arrangement in July 2016 in the amount of SDR 2.504 billion (or 280 percent of quota), equivalent to US$3.556 billion.
  - The arrangement supports rebuilding fiscal and external buffers and promoting higher, more inclusive growth.
  - The first review was completed on May 12, 2017.
- Staff recommendation and assessment:
  - Staff considers Morocco continues to meet the PLL qualification criteria and recommends completion of the second review of the PLL arrangement.
  - Assessment highlights:
    - Morocco’s economic fundamentals and policy frameworks are sound; the country is implementing and has a track record of implementing generally sound policies and remains committed to maintaining such policies.
    - Staff assesses strong performance in four out of five PLL qualification areas: external, monetary, financial, and data.
    - The fiscal area does not substantially underperform the other areas.
    - The authorities have not drawn on the arrangement and continue to treat it as precautionary.
- Program implementation notes:
  - The end-March 2017 fiscal deficit IT was met; the end-March 2017 reserves IT was missed.
  - Reserves declined in May-June due to BAM interventions to counter devaluation anticipations, higher energy imports, and accelerated FDI outflows and loan repayments; pressures subsided after the government announced the initial fluctuation band would be five percent and that the exchange rate transition would not start immediately.
  - Staff encourages starting the gradual transition to greater exchange rate flexibility as soon as possible; technical assistance ongoing.

### Risks, outlook, and policy recommendations
- Risks:
  - Significant domestic and external risks remain, including weak growth in the euro area and geopolitical risks in the region.
  - Domestic social tensions, notably since October 2016 in the Rif region, represent political and social risks; authorities have announced steps to accelerate local social programs and investment projects.
  - Financial sector risks from bank expansion in Africa given riskier operating environments and lower regulatory standards in some host countries.
- Outlook and recommended policy mix:
  - Maintain gradual fiscal consolidation while preserving social priorities and minimizing social impact of reforms.
  - Continue accommodative monetary policy to support recovery, while preparing for a gradual move to greater exchange rate flexibility.
  - Accelerate tax reforms to strengthen revenue performance ahead of expected declines in grant revenues from 2018.
  - Improve targeting and coordination of social spending through better governance, transparency, efficiency, and development of a social registry.
  - Strengthen financial sector supervision and implement FSAP recommendations, including enhancing supervisory capacity and finalizing the new central bank law to strengthen independence and clarify the role for financial stability.

*International Monetary Fund staff report — Executive Summary (July 19, 2017).*

### 14.      Finally, structural reform implementation needs to accelerate to boost medium-term

### 14.      Finally, structural reform implementation needs to accelerate to boost medium-term 

### Structural reform priorities and implementation status
- Business environment
  - Authorities intend to continue reforms, including further simplifying and modernizing administrative procedures (W-COM.-¶14), with the goal of positioning Morocco in the top 50 countries in the Doing Business ranking by 2021 (against 68 in 2017).
  - Regarding SME access to finance, important improvements to the insolvency and collateral frameworks will be introduced in 2018.
  - The recently-adopted limit on payment delays (60 days) is welcome.
  - Key reforms have recently been further delayed: more concrete progress is needed in implementing the national strategy against corruption adopted in 2015.
  - Members of the Competition Council need to be appointed to exercise the powers given in 2014 to promote domestic competition (W-COM.-¶14).

- Education and labor market
  - New government has outlined specific objectives (Box 1). Progress needed in implementing the 2015–30 education strategy, including promptly adopting the draft framework law, and developing a concrete action plan under the national employment strategy adopted in 2015.
  - The framework law and the action plan are now expected to be finalized in 2018 (W-COM.-¶14).
  - Labor market reforms should focus on hiring and firing costs, in particular by relaxing restrictions on fixed-term contracts and layoffs to better integrate young workers, while establishing adequate safety nets for the unemployed.
  - On education, authorities plan to increase investment in school infrastructure, facilitate deployment of additional teachers, and expand cash transfer programs in rural areas to improve educational outcomes, notably for girls.

### Outlook and key quantitative projections
- Growth
  - Growth is expected to rebound to 4.8 percent in 2017, reflecting a strong pickup in agricultural output and a slow recovery of nonagricultural activity.
  - In 2018, assuming a return to normal agricultural production, growth would slow to 3.0 percent despite steady pick-up in nonagricultural growth.
  - Over the medium term, growth should reach 4.6 percent, subject to continued reforms and assuming an average agricultural production level.
  - Additional reforms in education, labor market and competition will be needed to achieve the government’s objective of 5.5 percent by 2021.

- Inflation
  - Inflation is expected to remain low at 0.9 percent in 2017 due to a decline in domestic food prices.
  - Projected to stabilize around 2 percent over the medium term.

- External sector and reserves
  - Current account deficit should narrow to about 4.0 percent of GDP in 2017, and remain around 2–3 percent of GDP thereafter.
  - Drivers: (i) continued export growth including higher value-added manufacturing and recovering phosphate exports; (ii) steady imports with slowly rising oil prices and continued investment-related imports; (iii) declining grant revenues.
  - FDI inflows are projected to remain robust.
  - Reserves position expected to rise to around seven months of imports, or 103 percent of the standard Assessing Reserve Adequacy (ARA) metric (136 percent of the adjusted metric) in the medium term.

- Fiscal outlook
  - Overall fiscal deficit expected to decline to 3.5 percent of GDP in 2017 and stabilize around 2.1 percent of GDP in the medium term.
  - Government objective: reduce public debt to 60 percent of GDP by 2021.
  - Achieving objectives will require expeditious measures to enhance tax revenues, continued efforts to contain current spending, and identifying contingency measures for potential grant revenue shortfalls.
  - Projected tax revenue increases have been revised downward relative to the PLL request (by 1 percentage point of GDP in 2021), reflecting lower expected payoffs of tax reforms, including because of recent delays in reform implementation.
  - Offsetting measures include a parallel reduction in capital transfers to SOEs, current spending by local entities, and public investment.

### Risks and scenarios
- Balance of risks tilted to the downside.
  - Domestic risks: delays in implementing key reforms and policy uncertainty (including fiscal and structural reforms) could reduce future fiscal space, contribute to social tensions, adversely impact the external sector (lower tourism receipts, remittances, or grants), and weaken the expected pickup in potential growth.
  - Exchange rate risks: renewed uncertainty regarding the exchange rate transition could lead to market pressures, potentially weakening the current account and reserves.
  - External risks: weak growth in the euro area could slow activity via lower exports, tourism, FDI flows, and remittances; geopolitical risks could increase oil price volatility and reduce tourism and investor confidence; tighter, volatile financial conditions and retreat from cross-border integration could increase borrowing costs and reduce trade and capital flows.
  - Upside: continued lower energy prices would help further narrow external and fiscal imbalances.

- External Stress Index (Box 2)
  - Purpose: indicator of the evolution of the external environment faced by a country (mandated for FCL and PLL countries).
  - Main external risks identified: (i) protracted slow growth in advanced economies (especially euro area); (ii) heightened geopolitical risks leading to higher oil prices and dislocations to capital flows and tourism receipts; (iii) surge in global financial market volatility increasing borrowing costs and disrupting portfolio flows.
  - Proxy variables: (i) euro area growth (captures lower exports, remittances, FDI, tourism receipts); (ii) oil prices (captures higher oil imports); (iii) VXEEM (emerging markets volatility index) (captures impact of global financial volatility).
  - Weights (as of the PLL request stage): euro area growth 0.580; VXEEM 0.095; change in oil price 0.324.
  - Baseline scenario: July 2017 WEO projections for euro area growth and oil prices; VXEEM consistent with VIX futures as of July 7, 2017. Result: external economic stresses marginally declined relative to July 2016 request.
  - Downside scenario: assumes euro area growth one percentage point lower than baseline, a US$15 increase in oil prices relative to baseline, and an increase in VXEEM by two standard deviations; external stresses broadly comparable to July 2016 request.
  - Overall assessment: external pressures under the baseline have abated in recent years, but the model does not include a proxy for geopolitical risk (which would suggest relatively more heightened stress).

### Review of PLL qualification — staff assessment and institutional strengths
- Staff assesses that Morocco continues to qualify for a PLL arrangement (staff’s assessment consistent with generally positive assessment by Executive Board during 2016 Article IV and first PLL review).
- General assessment highlights
  - Economic fundamentals and institutional policy frameworks remain sound; country has a track record of implementing sound policies and is committed to doing so.
  - Macroeconomic developments broadly positive: favorable fiscal developments until May 2017, current account expected to narrow in 2017, public and external debts sustainable.
  - Authorities have implemented generally sound policies, though reform implementation has slowed.
  - Authorities committed to maintaining sound policies; public finances expected to improve in 2017; government intends to reduce public debt to 60 percent of GDP by 2021 (instead of 2020 initially agreed), requiring fiscal deficit around 2.1 percent of GDP.
  - Policy and institutional frameworks increasingly flexible: new OBL enhancing budgetary procedures and practices; Morocco performs well in fiscal policy countercyclicality indicators; BAM has clear mandate and authorities intend to upgrade monetary policy regime as part of transition to greater exchange rate flexibility and inflation targeting.
  - Morocco scores mid-range on World Bank anti-corruption and government effectiveness ranking.

- Specific PLL qualification areas
  - Morocco performs strongly in four of five PLL areas: external position and market access; financial sector and supervision; monetary policy; data adequacy.
  - Does not substantially underperform in fiscal policy.
  - External position and market access details:
    - Trade deficit declined between 2012–15, widened in 2016, should narrow in 2017.
    - Emerging sector exports now account for 33 percent of total exports, against 14 percent in 2000.
    - Based on 2016 external balance assessment (EBA), Morocco’s external position is moderately weaker than suggested by fundamentals and desirable policies; various approaches yield differing valuations (current account gap, REER overvaluation/undervaluation estimates).
    - External debt relatively low: 34.6 percent of GDP at end-2016 and expected to decline to about 28 percent of GDP over the medium term.

*cr17264 - 14.      Finally, structural reform implementation needs to accelerate to boost medium-term*

### 11.1 percent of total debt or 3.9 percent of GDP). Loans from bilateral and development partners

### cr17264 - 11.1 percent of total debt or 3.9 percent of GDP). Loans from bilateral and development partners

### Qualification criteria and external position
- Criterion 1–2 (external position and market access): Sovereign spreads narrowed between 2011-16; Morocco continues to be rated favorably by major ratings agencies.
- Morocco has issued international bonds at favorable terms (most recently in 2014).  
  - Examples of sovereign bond issuances noted: ten-year EUR1 billion bond at 3.5 percent in mid-2014; ten-year US$1.5 billion bond at 4.25 percent in 2013; twenty-year EUR0.75 billion bond at 5.5 percent in 2013.
- The average maturity of public external debt has been extended to eight years and six months currently (against seven years and four months in 2009).
- Reserves: expected to remain comfortable despite a decline in the first half of 2017:
  - about six months of imports at end-2017,
  - ample coverage of short-term debt and broad money,
  - 90 percent of the standard ARA metric at end-2017,
  - 119 percent of the metric adjusted for capital controls at end-2017 (against 99 percent and 129 percent at end-2016, respectively).
  - By 2022, reserves are expected to strengthen to seven months of imports, 103 percent of the standard ARA metric, and 136 percent of the metric adjusted for capital controls.

### Fiscal policy
- Criterion 5—Sound public finance, including a sustainable public debt position:
  - Authorities aim to reduce public debt to 60 percent of GDP by 2021 (against 64.7 percent of GDP in 2016).
  - Achieving that target will require bringing the fiscal deficit to about 2.1 percent of GDP in the medium term.
  - Public debt is described as sustainable and resilient to various shocks despite high gross financing needs.
  - Average maturities increased from six years and six months in 2014 to seven years and five months in 2016.
- Policy actions and priorities:
  - Control civil service wage bill by limiting net creation of positions and rate of career promotions.
  - Prioritize investment in infrastructure and human capital.
  - Future fiscal consolidation should rely more on accelerated tax reforms: broadening the tax base, reducing exemptions, boosting VAT revenues, and improving corporate taxation.
  - Further civil service reform to generate long-term savings.
  - Fiscal decentralization to ensure sound public financial management at the regional level.
  - Draft law to reinforce governance and oversight of state-owned enterprises (SOEs) should be submitted to parliament in the near-term.

### Monetary policy
- Criterion 6—Low and stable inflation:
  - Morocco maintains moderate and stable inflation, expected to continue in the medium term with well anchored inflation expectations.
  - Authorities aim to gradually shift to an inflation targeting regime as part of transition to greater exchange rate flexibility (W-COM.-¶12).
  - Preconditions for transition largely in place: comfortable fiscal and external buffers; financial sector resilience; exchange rate alignment with fundamentals; limited FX risk exposures; estimated moderate pass-through of exchange rate movements to consumer prices.
  - Authorities have announced the width of the band for the first phase of the transition, but have not yet communicated a date for the start of the transition.

### Financial sector soundness and supervision
- Criterion 7—Sound financial system and absence of solvency problems:
  - Banks have adequate capital buffers and benefit from stable funding (mainly non-remunerated deposits).
  - NPL ratios at 7.8 percent at end-May 2017 remain relatively high.
  - Credit concentration risks are significant despite strict regulatory limits and declining aggregate exposure.
  - Moroccan banks’ expansion into Africa creates new channels of risk transmission.
  - Provisioning levels are high and increasing.
  - 2015 FSAP stress tests showed the banking system could withstand severe shocks associated with prolonged weak growth in advanced economies and greater global financial market volatility.
- Criterion 8—Effective financial sector supervision:
  - Bank supervision is effective and 2015 FSAP recommendations to strengthen it further are being implemented.
  - Introduction of stricter capital and provisioning requirements and enhancements to the macroprudential policy framework are underway.
  - Oversight of Moroccan banks expanding across Africa has been strengthened, including collaboration with supervisory agencies in host countries (W-COM.-¶11).

### Data adequacy
- Criterion 9—Data transparency and integrity:
  - Overall data quality continues to be strong and adequate to conduct effective surveillance and program monitoring.
  - Morocco subscribes to the Special Data Dissemination Standard.
  - Authorities are committed to improving data quality and access.
- Data provision and quality are assessed as fully adequate.

### Other program issues and risks
- End-March 2017 targets:
  - The end-March 2017 IT for the fiscal deficit was met without adjustments and with a substantial margin once the adjustor for grants is considered.
  - The end-March 2017 NIR IT was missed by US$1.1 billion (or 4 percent of the adjusted target), reflecting a widening current account deficit since July 2016 (by nearly US$3 billion at end-2016) due in part to subdued phosphate exports, increased capital equipment and food imports, and higher energy imports in early 2017.
  - The NIR target for September 2017 has been adjusted downward relative to the first PLL review.
- PLL drawdown considerations:
  - Should Morocco draw on the entire amount available, Fund obligations would represent a small share of Morocco’s total external debt (a maximum of 8.2 percent over the projection period), debt service (36.4 percent), gross international reserves (14.6 percent), and exports (9.8 percent).
  - The impact of the PLL arrangement on the Fund’s liquidity and potential exposure remains moderate.
  - Note: illustrative scenario used at time of PLL arrangement request suggested reserves may be 25 percent lower and exports 6 percent lower, implying peak IMF credit ratios of 19.5 percent and 10.4 percent instead of 14.6 percent and 9.8 percent in the table referenced.

### Safeguards and institutional reforms
- 2015 assessment found a robust safeguards framework with strong control mechanisms at the central bank.
- One remaining recommendation: strengthen the BAM law in areas of autonomy and governance.
- Authorities have drafted a new central bank law to be submitted to Parliament in mid-2017.

### Staff appraisal and recommendations
- Program status and macro outlook:
  - Program remains on track.
  - End-March 2017 fiscal deficit IT met; NIR IT missed due to widening current account deficit driven by imports related to the drought and infrastructure projects.
  - Macroeconomic situation improving in 2017: growth expected to accelerate, public deficit expected to decline, external imbalances projected to narrow.
- Policy recommendations:
  - Continue sustained fiscal and structural reforms to achieve higher and more inclusive growth and reduce unemployment.
  - Continue fiscal adjustment while preserving fiscal space for critical social and investment spending through:
    - enhancing public revenues (broadening the tax base, reducing exemptions),
    - civil service reform to generate long-term savings,
    - careful implementation of fiscal decentralization,
    - strengthened SOE oversight.
  - Gradual transition to a more flexible exchange rate regime should start as soon as possible to better absorb external shocks and maintain competitiveness.
  - Accelerate structural reforms to strengthen the business climate (including governance and reduced corruption), improve education, job creation, and women’s participation in the labor force.
  - Adopt amended central bank law and continue implementing 2015 FSAP recommendations to strengthen the financial sector policy framework.

### Conclusion
- Morocco continues to meet the PLL qualification criteria.
- IMF Executive Board’s assessment in the 2016 Article IV consultation and the first review under PLL was positive.
- Morocco performs strongly in four out of five PLL qualification areas (external position and market access, financial sector and supervision, monetary policy, and data adequacy), and does not substantially underperform in the fiscal policy area.

*MOROCCO — INTERNATIONAL MONETARY FUND.*

### 31.      Against this background, staff recommends the completion of the second review

### Against this background, staff recommends the completion of the second review under the PLL arrangement.

### Macroeconomic outlook and real developments
- Real GDP: 2016 growth slowed to "1.2" (from table: Real GDP series shows "2016 1.2" and 2017 proj. "4.4" — preserve as presented)
  - Real GDP series: 2012 3.0; 2013 4.5; 2014 2.7; 2015 4.5; 2016 1.2; 2017 4.4; 2018 4.5; 2019 4.8; 2020 3.0; 2021 4.0; 2022 4.2; 2023 4.5; 2024 4.6 (table header: "Real GDP3.04.52.74.51.24.44.54.83.04.04.24.54.6")
- Agriculture: Real agriculture GDP: 2016 -12.8; 2017 10.8; 2018 13.9; 2019 16.6 (table: "Real agriculture GDP-9.117.2-2.211.9-12.810.813.916.6-1.36.66.46.46.8")
- Demand composition (2016): Domestic demand was the main driver of growth; investment picked up significantly (Figure notes).

- Inflation
  - Consumer prices (end of period): 2016 1.8; 2017 1.2; 2018 1.1; 2019 1.1; 2020 1.6; 2021 2.0; 2022 2.0; (table: "Consumer prices (end of period)2.60.41.60.61.81.21.11.11.62.02.02.02.0")
  - Core inflation remains moderate and food prices are declining (figure note; CPI series shown).

### External sector and reserves
- Current account
  - Current account excluding official transfers: 2016 -3.3; 2017 -4.3; 2018 -4.9; 2019 -3.9; 2020 -3.4; 2021 -2.6; 2022 -2.0; 2023 -1.5 (table: "Current account excluding official transfers-9.6-8.3-7.6-2.6-5.3-3.3-4.3-4.9-3.9-3.4-2.6-2.0-1.5")
  - Current account including official transfers: 2016 -2.3; 2017 -3.3; 2018 -4.0; 2019 -3.2; 2020 -3.0; 2021 -2.4; 2022 -1.9; 2023 -1.4 (table: "Current account including official transfers-9.3-7.6-5.9-2.1-4.4-2.3-3.3-4.0-3.2-3.0-2.4-1.9-1.4")
- Trade and services
  - Merchandise trade balance (percent of GDP): 2016 -15.8; 2017 -16.7; 2018 -16.4; 2019 -15.7; 2020 -15.1; 2021 -14.4; 2022 -14.0; 2023 -13.6 (Table 4 and Table 1 entries)
  - Exports (US$ percent change): 2016 5.4; 2017 5.9; 2018 5.1; 2019 7.5; 2020 6.9; 2021 7.2; 2022 7.0; 2023 6.7 (table memo: "Exports of goods and services (in U.S. dollars, percentage change)-0.14.57.4-7.02.95.45.95.17.56.97.27.06.7")
  - Imports (US$ percent change): 2016 2.8; 2017 4.4; 2018 4.2; 2019 5.1; 2020 5.1; 2021 5.5; 2022 5.4 (table memo: "Imports of goods and services (in U.S. dollars, percentage change)2.24.31.0-16.59.63.92.84.44.25.15.15.55.4")
- Reserves and adequacy
  - Gross reserves (US$ billions): 2016 26.3; 2017 24.6; 2018 25.5; 2019 27.2; 2020 29.7; 2021 32.9; 2022 37.2 (Table 1: "Gross reserves (in billions of U.S. dollars) 17.419.020.523.025.427.626.324.225.527.229.732.937.2")
  - In months of next year imports: 2016 6.9; 2017 6.5; 2018 5.9; 2019 5.9; 2020 6.0; 2021 6.2; 2022 6.5; 2023 7.5 (table: "In months of next year imports of goods and services4.34.66.06.16.46.96.55.95.96.06.26.57.5")
  - In percent of Fund reserve adequacy metric: 2016 97.7; 2017 90.1; 2018 90.0; 2019 90.5; 2020 92.0; 2021 96.2; 2022 102.9 (table: "In percent of Fund reserve adequacy metric 2/75.674.379.994.799.2101.797.690.190.090.592.096.2    102.9")

- External financing and flows (Table 8 highlights)
  - Gross financing requirements (US$ millions): 2016 6,653; 2017 6,743; 2018 5,612; 2019 5,590; 2020 5,036; 2021 4,531; 2022 3,834
  - Current account deficit (US$ millions): 2016 4,537; 2017 4,352; 2018 3,622; 2019 3,573; 2020 3,083; 2021 2,534; 2022 1,967
  - FDI (net) (US$ millions): 2016 1,683; 2017 1,684; 2018 2,234; 2019 2,448; 2020 2,679; 2021 2,910; 2022 3,158
  - Change in gross reserves (US$ millions): 2016 (2,764); 2017 1,838; 2018 (1,257); 2019 (1,657); 2020 (2,388); 2021 (3,071); 2022 (4,189)

### Fiscal developments
- Budget and public finances (Table 1 and Table 3)
  - Revenue (percent of GDP): 2016 26.0; 2017 26.1; 2018 26.0; 2019 26.1; 2020 25.9; 2021 25.9; 2022 25.8; projections through 2022 show revenue near 26.2–26.3 (Table 1 series: "Revenue28.027.828.026.526.126.026.125.925.925.826.026.226.3")
  - Expenditure (percent of GDP): 2016 29.1; 2017 29.6; 2018 29.4; 2019 28.9; 2020 28.5; 2021 28.5; 2022 28.3 (Table 1: "Expenditure35.232.932.930.730.229.129.629.428.928.528.528.328.4" and Table 3 percent series)
  - Budget balance (overall): 2016 -4.1; 2017 -3.0; 2018 -3.5; 2019 -3.5; 2020 -3.0; 2021 -2.7; 2022 -2.4; projections to 2022 show gradual narrowing (Table 1: "Budget balance -7.2-5.1-4.8-4.2-4.1-3.0-3.5-3.5-3.0-2.7-2.4-2.1-2.1")
  - Primary balance (excluding grants): 2016 -2.4; 2017 -1.4; 2018 -1.8; 2019 -1.9; 2020 -1.2; 2021 -0.7; 2022 -0.4 (Table 1: "Primary balance (excluding grants) -4.8-3.2-3.6-1.9-2.4-1.4-1.8-1.9-1.2-0.7-0.4-0.2-0.1")
- Public debt
  - Total government debt (percent of GDP): 2016 63.3; 2017 64.7; 2018 63.8; 2019 64.3; 2020 63.2; 2021 62.9; 2022 61.1; 2023 60.5; 2024 59.1; 2025 57.6 (Table 1: "Total government debt56.561.763.363.764.763.864.363.262.961.160.559.157.6")
  - DSA baseline: Nominal gross public debt series: 2015 53.6; 2016 63.7; 2017 64.7; 2018 63.2; 2019 62.9; 2020 61.1; 2021 60.5; 2022 59.1; 2023 57.6 (Figure 3/Table: "Nominal gross public debt53.663.764.763.262.961.160.559.157.6")
  - Public gross financing needs (percent of GDP): 2015 13.7; 2016 13.4; 2017 10.4; 2018 10.4; 2019 10.1; 2020 8.1; 2021 8.3; 2022 7.7; 2023 6.7 (Figure 3: "Public gross financing needs13.713.410.410.110.810.28.37.76.7")
  - Sovereign spreads: Spread (bp) 179; CDS (bp) 138 (Figure 3)

- Fiscal trend notes (Figure and tables)
  - Fiscal consolidation stopped in 2016 but is expected to resume in 2017 (Figure 2 note).
  - Public revenues weakened in 2016; public expenditures are well contained (Figure 2 note).
  - Cyclical and structural fiscal balances deteriorated in 2016 (Figure 2 note).

### Monetary and financial sector
- Monetary aggregates (Table 5)
  - Net foreign assets (billions dirhams): 2016 251.9; 2017 230.9
  - Broad money (billions dirhams): 2016 1,205.8; 2017 1,278.1
  - Credit to the economy (billions dirhams): 2016 826.2; 2017 871.6
  - Credit to economy/GDP (percent): 2016 80.2; 2017 81.3 (Table 5 memorandum: "Credit to economy/GDP (in percent)84.986.084.383.980.281.381.2")

- Financial soundness (Table 6)
  - Nonperforming loans (NPLs) to total loans: 2016 7.8 (Table 6 series "Nonperforming Loans (NPLs) to total loans4.84.85.05.96.97.47.87.78.07.67.8")
  - Regulatory capital to risk-weighted assets: 2016 13.7 (Table 6: "Regulatory capital to risk-weighted assets 12.311.712.313.313.813.713.7 (*)na14.2na")
  - Capital to assets: 2016 9.2 (Table 6: "Capital to assets8.38.18.58.68.89.19.29.49.39.19.1")
  - Liquidity: Liquid assets to total assets 2016 13.5; liquid assets to short-term liabilities 2016 17.1 (Table 6)

### Debt sustainability and capacity to repay
- External debt and vulnerabilities (Table 9 and Table 7)
  - Baseline external debt (percent of GDP): 2016 33.6; 2017 33.6; 2018 32.6; 2019 31.4; 2020 30.3; 2021 29.1; 2022 28.1 (Table 9: "Baseline: External debt 1/29.130.231.033.433.633.632.631.430.329.128.1")
  - Gross external financing need (billions US$): 2016 10.9; 2017 10.1; 2018 8.5; 2019 3.9; 2020 6.8; 2021 6.9; 2022 5.7 (Table 9: "Gross external financing need (in billions of US dollars) 5/10.910.18.53.96.86.95.75.75.14.63.9")
  - Capacity to repay (Table 7): Upon approval of the second review Morocco can draw up to 280 percent of quota. GRA credit to Morocco (SDR million) series: 2016 1,252.0; 2017 2,504.0; 2018 2,504.0; 2019 2,504.0; 2020 2,191.0; 2021 939.0; 2022 0.0 ("GRA credit to Morocco1,252.02,504.02,504.02,504.02,191.0939.00.0")
  - GRA credit in percent of quota: 2016 140.0; 2017 280.0; 2018 280.0; 2019 280.0; 2020 245.0; 2021 105.0; 2022 0.0 (Table 7: "(In percent of quota)140.0280. 0280.0280.0245.0105.00.0")
  - Debt service due on GRA credit (SDR million): 2016 0.0; 2017 28.4; 2018 56.4; 2019 56.4; 2020 371.3; 2021 1,283.7; 2022 946.0 (Table 7 line "Debt service due on GRA credit 0.028. 456.456.4371.31,283.7946.0")
- Public sector DSA (Figure 3 baseline)
  - Change in gross public sector debt (cumulative 2015–2022): net reduction projected cumulative -7.1 (Figure 3: "Change in gross public sector debt0.50.31.0-1.5-0.4-1.8-0.6-1.5-1.5-7.1")
  - Identified debt-creating flows (cumulative): -4.4 (Figure 3: "Identified debt-creating flows0.31.62.80.10.3-0.8-1.0-1.4-1.5-4.4")
  - Primary deficit contributions: primary deficit series and cumulative primary balance contribution noted; automatic debt dynamics and interest-growth differential contributions presented (Figure 3 details).

### Key policy implications and IMF staff recommendation
- Staff recommendation:
  - "Staff recommends the completion of the second review under the PLL arrangement." (opening line)
  - Note appended in Table 7: "Upon approval of the second review of the PLL arrangement Morocco can draw up to 280 percent of quota. The Moroccan authorities have expressed their intention to treat the arrangement as precautionary."
- Policy context drawn from data:
  - Fiscal consolidation is expected to resume in 2017 after a pause in 2016 (Figure 2).
  - Lower borrowing and higher outward FDI should lower capital account flows for 2017 (figure note).
  - Reserves coverage remains ample by several reserve adequacy metrics (figure and tables).

*Source: IMF staff report excerpts and tables (cr17264).*

### Appendix I. Written Communication

### Appendix I. Written Communication

### Economic outlook and macroeconomic indicators
- GDP growth:
  - 2016: "limited to 1.2 percent"
  - 2017 expected: "4.8 percent"
  - 2017 noted as "its highest level since 2011"
- Inflation:
  - 2017 expected: "0.9 percent" (also described elsewhere as "less than 1 percent")
- Unemployment:
  - Q1 2017: "10.7 percent"
  - Q1 2016: "10.4 percent"
- Current account:
  - 2016: "4.4 percent" of GDP (deficit)
  - 2017 expected: "4 percent" of GDP (deficit)
- Foreign exchange reserves:
  - 2017: "6 months of imports"
  - Reserves expected to "strengthen in the medium term"
- External position and financing:
  - Morocco "does not face external financing needs"
  - The PLL arrangement (approved July 22, 2016) is treated as precautionary insurance

### Fiscal policy, consolidation targets and public debt
- Fiscal deficit:
  - 2016: "4.1 percent of GDP"
  - 2017 objective/target: "3.5 percent of GDP"
  - PLL target for 2021: "2.1 percent of GDP"
- Public debt ratio:
  - 2016: "64.7 percent" of GDP
  - 2017 expected: "63.2 percent" of GDP (against "64.3 percent projected under the PLL")
  - Medium-term objective: reduce public debt ratio to "60 percent by 2021"
- Fiscal measures to achieve 2017 target:
  - "increased tax revenues" and "better control of current expenditures, notably with regards to the wage bill and subsidies"
- Fiscal performance through mid-2017:
  - March 2017 indicative target met
  - June 2017: "significant overperformance in tax collection and current spending control, including on wages"

### Revenue-side reforms and tax policy
- Continued implementation of tax reform in line with the 2013 national tax conference recommendations to make taxation "simpler, more equitable and more favorable to competitiveness"
- Priorities:
  - "continuing to reduce exemptions, particularly those granted to large agricultural firms"
  - "simplifying the VAT by reducing the number of rates"
  - "expanding the tax base" by modernizing tax administration and "gradually incorporating the informal sector"
- Measures introduced in the 2017 budget; additional measures to be incorporated in the 2018 budget

### Expenditure control, public investment and civil service reform
- Expenditure priorities:
  - Control spending while "prioritizing investment in infrastructure and human capital"
  - Maintain public investment "at a high level" while ensuring fiscal consolidation and increasing effectiveness
- Wage bill target:
  - Medium-term objective: reduce civil service wage bill, "including social contributions, to bring it back to 10.5 percent of GDP"
  - Means: "limiting the net creation of positions and the rate of advances and promotions" and limiting wage increases to the budget envelope
- Civil service reform:
  - Comprehensive reform being developed to "strengthen efficiency and return, as well as to alleviate fiscal costs"
  - "Legislative and regulatory texts concerning mobility and contractual employment have already been promulgated"
- Public investment management and PPPs:
  - Commitment to an "integrated system for the management and assessment of public investments"
  - Develop public-private partnerships (PPPs) to strengthen infrastructure supply and quality while limiting budgetary expense and risk
- Pension reform:
  - "Gradual implementation of the pension reform began in September 2016"
  - Medium-term expectation: institutional structure of retirement system to shift toward a "bipolar (private sector/public sector) system"

### Public financial management and decentralization
- Organic Budget Law (OBL) implementation:
  - "Most of the provisions of the OBL were implemented in 2016" with remaining provisions to be put in place "gradually by 2020"
  - Personnel appropriations limiting provision entered into force on "January 1, 2017"
  - Regulatory measure limiting carry-forward of investment appropriations to enter into effect on "January 1, 2018"
- Governance of public enterprises:
  - "A draft law to strengthen the governance and auditing of public enterprises and establishments" is being examined by the General Secretariat of the Government
- Fiscal decentralization and advanced regionalization:
  - Fiscal decentralization has begun; comprehensive strategy to be finalized in 2017
  - Measures to ensure "good governance and better performance of these regional authorities" including capacity building, improved transparency and accounting
  - "A set of laws and regulations on the management and governance of local authorities were adopted in June" and regional project execution agencies are being set up
  - "A national charter of administrative decentralization is now being prepared"

### Monetary policy, central bank reform and financial sector resilience
- Bank Al-Maghrib (BAM) policy stance:
  - Maintained "an accommodative monetary policy" in a context of limited non-agricultural growth, moderate inflation, and comfortable reserves
  - BAM will continue to "promote appropriate financing of the economy, and in particular for SMEs"
- Central bank law:
  - Draft central bank law approved by the Government Council on "July 13, 2017" and to be submitted to Parliament; expected to "further reinforce BAM’s independence" and expand missions to contribute to financial stability and financial inclusion
- Banking sector soundness:
  - Banking sector described as "sound and resilient"
  - NPLs: "have not increased" and are "well provisioned" though banks face "credit concentration risks" and exposure-related risks in Africa
  - BAM actions: raised criteria for granting and supervising loans to large groups; "completing the rules of loan classification and provisioning"; closer coordination with supervisory authorities in host countries
- Macroprudential measures and resolution:
  - BAM "has adopted regulations introducing counter-cyclical capital buffers (CCB)"
  - Finalized end-2016 guidance for "recovery plans for systemically important institutions"
  - Authorities will "strengthen the macro-prudential framework" and "strengthen the framework for handling problem banks by introducing legal resolution compatible with the international standards of the Financial Stability Board"

### Transition to greater exchange rate flexibility
- Policy intent:
  - Authorities "determined to gradually introduce a more flexible foreign exchange system and to transition to an inflation targeting regime"
  - Benefits cited: "better absorb exogenous shocks", "preserve competitiveness", "support trade diversification"
- Preconditions and sequencing:
  - Requirements for transition largely met: improvement in fiscal and external buffers, financial sector resilience, alignment of exchange rate with fundamentals, gradual diversification of the economy
  - Government will "announce in due course the start of the implementation of this reform"
- Operational developments:
  - Planned start by end-June 2017 postponed after "sustained demand for hedging" led to "a significant decline in official reserves" and increased commercial banks’ foreign assets
  - Postponement and indication of "initial widening of the band will be limited" helped stabilize official reserves
  - Reserves expected to "start to recover" helped by seasonal tourism and remittances and as options bought by market participants expire

### Structural reforms and competitiveness
- Authorities intend to accelerate structural reforms to:
  - "strengthen competitiveness, increase growth potential and reduce unemployment, particularly among youth"
- Key reform areas and actions:
  - Education, training and scientific research: "A draft law setting out the guidelines and objectives ... will be finalized in early 2018"
  - Business environment: continue national strategy to fight corruption, improve quality of public services, dematerialize administrative procedures
  - Competition: implement bodies and means enabling the Competition Council to "fully exercise its powers in 2017"
  - Employment: finalize the action plan of the National Strategy for Employment in early 2018, including measures to "boost youth employment rate" and "increase labor force participation, in particular by women"
  - Active labor market policies and vocational training to be improved

### PLL performance indicators, quantitative targets and adjustors
- Policy stance on PLL: treat arrangement as "precautionary" and draw only if unforeseen exogenous shocks occur
- Compliance and monitoring:
  - In the PLL, "the fiscal deficit indicative target was met" for end-March 2017
  - "Net international reserves were below the target" for end-March 2017
  - Authorities will "provide the IMF with all information needed" to monitor PLL indicators listed in Table 1
- Table 1: Morocco: Quantitative Indicative Targets (as presented)
  - Indicative targets — Net international reserves (NIR) of Bank Al-Maghrib (BAM) 1/ end-of-period stock, in millions of U.S. dollars evaluated at the program exchange rate:
    - 25,981
    - 25,717
    - 26,302
    - 27,461
    - 26,825
    - 25,719
    - 23,199
  - Indicative targets — Fiscal deficit (cumulative since beginning of fiscal year, eop in millions of dirham):
    - 27,228
    - 30,629
    - 26,973
    - 7,302
    - 9,499
    - 6,747
    - 26,135
  - Memorandum items — Adjustor on NIR (in millions of U.S. dollars):
    - 918
    - 567
    - 351
    - 2,011
    - 636
    - 1,375
    - 2,819
  - Memorandum items — Adjustor on the fiscal deficit (in millions of dirham):
    - 7,045
    - 3,400
    - 3,645
    - 2,410
    - 2,197
    - 213
    - 7,500
  - Notes appended in the table:
    - "Source: IMF staff estimates."
    - "9/30/16" and "3/31/17" appear in the table context
    - Footnote 1/: "End-of-period (eop) stock, in millions of U.S. dollars, evaluated at the program exchange rate fixed at the end-April 2016, namely 9.5695 MAD/$."
    - Footnote 2/: Adjustor description for NIR (cumulative from end-September 2016)
    - Footnote 3/: Adjustor description for fiscal deficit (adjustors for 2016 cumulative from end-December 2015; for 2017 cumulative from end-December 2016)

### Ex-post evaluation (EPE) and authorities’ assessment
- Authorities' view of the EPE:
  - Share conclusions about "significant improvement in Morocco’s fundamentals and reduction in vulnerabilities under the 2014–2016 PLL"
  - Note growth in 2014–16 turned out lower than expected, but contest linking shortfall to over-optimism in projections; call for further analysis on fiscal consolidation and structural reform impacts
  - Disagree with staff indication that gains in competitiveness were modest; point to "significant diversification of exports to new sectors and new regions"
- Transition to exchange rate flexibility (EPE-related developments):
  - Unexpected surge in hedging demand led to reserve decline and postponement of transition timing
  - Authorities remain "committed to moving to a more flexible exchange rate regime" and will announce the start when appropriate

### Conclusion and policy commitment
- Authorities assert policies in the Written Communication and April 28, 2017 communication are "adequate to achieve the objectives of the economic program supported under the PLL arrangement"
- Commitments include:
  - Take additional measures as needed
  - Continue to treat PLL as precautionary and assess need for continued engagement at expiration
  - Continue reforms to "unlock the economy’s potential and achieve higher and more inclusive and job-rich growth"
  - Continue to reduce vulnerabilities and strengthen resilience

*Source: IMF staff estimates.*

---


_Source: https://www.imf.org/-/media/files/publications/cr/2017/cr17264.pdf_